Review of the Managed Investments Act 1998

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Review of Managed Investments Act 1998
Commonwealth Bank Group Submission

Implementation and benefits of the MIA

- The major aims of the MIA were to provide greater certainty and better protection to investors. In our view these aims have been met.

- Having a single responsible entity has provided certainty for investors. Investors now have a single point of resolution for any issues in relation to the operation of a fund. While third party service providers may be appointed the responsible entity remains ultimately liable to the investor. This certainty provides a clear benefit to investors over the previous dual manager-trustee structure.

- The operations of responsible entities are subject to detailed requirements contained in ASIC policy statements regarding licensing, financial requirements, scheme property arrangements and compliance plans. ASIC is also active in its surveillance of responsible entities, focusing its attention where it believes the greatest risk of investor detriment lies. ASIC has significant powers under the MIA to do, amongst other things, revoke licences, enter into enforceable undertakings, modify compliance plans and issue stop orders in relation to prospectuses. This has enhanced the protection of investors and has allowed ASIC to move quickly to address areas where investors interests may be compromised.

- ASIC's requirement for minimum net tangible assets has resulted in substantial responsible entities and custodians. Smaller operators who have not met the financial requirements have arranged for other substantial responsible entities and/or third party custodians to be appointed.

- There were significant industry costs in transitioning to the MIA regime. These costs were associated with:

    - the development of detailed compliance plans and compliance processes;

    - establishing and maintaining independent compliance committees;

    - obtaining a new licence; and

    - modifying all existing trust deeds to meet the new requirements for a managed investment scheme constitution.

    In addition to these implementation costs there have been ongoing running costs in complying with the MIA regime. Despite these costs, investors have enjoyed the benefits of a reduction in the costs of investing in managed investment schemes.

- The MIA regime has enhanced the focus on compliance throughout the industry with compulsory compliance plans and compliance committees for schemes. As a result, there has been a significant increase in the awareness of the importance of compliance and compliance processes. We have seen the development and expansion of compliance industry bodies such as the Association of Compliance Professionals of Australia and the Independent Compliance Committee Members Forum. This enhanced focus on compliance has extended to other areas of financial services, providing benefits for many consumers of financial services. This trend will continue with the recent introduction of the Financial Services Reform Act.

- The managed funds industry caters for differences in the size of schemes and covers a broad spectrum of investment schemes including property trusts, serviced apartments, mortgage schemes, equity funds, film schemes and agricultural schemes. The MIA legislation caters for this diversity by specifying core arrangements which must apply in each case while allowing flexibility as to the contents of the Constitution and Compliance Plan for each scheme.

- The industry has passed successfully through the MIA implementation stage and is now comfortable with the operation of the managed investment provisions of the Corporations Act 2001. Compliance procedures and practices have been developed and maintained. Any significant change to the overall approach of the managed investments regime would be costly to the industry and may ultimately impact on the cost of providing managed investment schemes to investors. To revert to a dual party system would revive the confusion which previously existed and it would be unclear as to which entity is liable in the event that a scheme suffers losses due to mismanagement and other factors.

Refinements which could be made

1. Differential fees

    The uncertainty regarding the interpretation of the Corporations Act 2001 equal treatment provisions in section 601FC(1)(d), has affected the ability of the industry to market products. ASIC has taken the view that the requirement to treat members equally extends to entry fees and has issued policy which restricts the ability of responsible entities to offer discounted fee arrangements.

    Responsible entities are therefore unable to offer discounts to retail investors on entry fees for special offers, relationship rebates, for older or pensioner investors or for their own employees etc. The end result is that investors lose out on the possibility of reduced entry fees for funds.

    Essentially entry fees are property of the responsible entity, not the scheme itself, and the responsible entity should be entitled to do what it wishes with them. The current provisions inhibit competition in the managed funds industry, without significantly promoting investor protection.

    However, such fees can be rebated by an intermediary which leads to an inconsistency in approach. For example a responsible entity cannot waive the entry fee for an investor who approaches them directly, but the same fee can be rebated fully by an intermediary such as an adviser or an online service provider.

2. Optional Trustee/Manager structure

    In our view it would be undesirable to introduce an optional Trustee/Manager structure. This would increase uncertainty as to the ultimate responsibility for operation and management of the Scheme. It would also increase the cost of operation schemes without necessarily increasing investor protection.

3. Voting of related party interests

    Section 253E provides that a responsible entity and its associates cannot vote on a resolution at a meeting of the scheme's members if they have an interest in the resolution other than as a member. This section should be amended to clarify that a responsible entity or associate which holds interests other than as beneficial owner can vote with those interests at the meeting. For example, where the responsible entity, in its capacity as trustee of one scheme, invests in another scheme of which it is also the responsible entity, it should be entitled to vote its interest in any members' meeting.

4. Amendment to constitutions

    Section 601GC presently permits a responsible entity to modify, repeal or replace a constitution if the responsible entity reasonably considers that the change will not adversely affect members' rights. If they adversely affect those rights, then a special resolution of the members is required to approve the change. There is some uncertainty as to what is meant by "members' rights".

    On one view, the members have a right to have the scheme operated in accordance with the constitution, precluding any changes without the members' consent. Another view is that relevant members' rights are limited to their statutory rights, which are incapable of being modified by the constitution itself.

    The section should be amended to clarify that the members must approve changes which adversely affect the following rights:

    · distribution rights;

    · withdrawal rights;

    · voting rights;

    · rights to receive information; and

    · rights in respect of scheme property.

5. Substantial shareholdings and aggregation of voting interests

    The substantial shareholdings provisions of the Corporations Act should be modified as they apply to responsible entities of multiple funds and corporate groups which contain more than one responsible entity.

    The substantial shareholding provisions place limits on the percentage of a company's shares which can be held by any one group of related parties. For the purposes of these limits shareholdings are aggregated across all associated entities including companies and managed investment schemes within a corporate group. For a responsible entity, which may operate a number of funds which hold shares, this limit for a particular shareholding may quickly be reached. This creates even more of a problem for corporate groups where there may be more than one responsible entity and a number of schemes holding shares in the same companies. In such situations substantial shareholding limits are very quickly reached.

    As a result a scheme may not be able to hold certain company shares due to the substantial shareholding limit having been reached at the aggregated corporate group level. A scheme may also need to sell shares in a particular company to avoid breaching substantial shareholding limits. This creates a conflict with the responsible entity's duty to act in the best interests of scheme members.

    The broad definition of related parties and associates under the Corporations Act also has inconsistent consequences for the voting of company shares. Within a corporate group there may be a number of entities, including companies and managed investment schemes which hold voting shares in the same company. These shares may be held by different schemes and different responsible entities within the same corporate group. Under the related parties definition these voting rights can be aggregated and voted as a single interest. This conflicts with a responsible entity's duty to act in the best interests of scheme members. In deciding how to vote their shares a responsible entity must act in the best interests of scheme members. This may not necessarily be the same interest as the corporate group as a whole.

    For the purposes of voting shares, responsible entities must be free to make decisions on the basis of their underlying duty to act in the best interests of their shareholders. Voting of shares should not be aggregated across managed investment schemes or multiple responsible entities within the same corporate group.



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